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Asset tangibility and capital allocation within multinational corporations

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Author Info
Diemo Dietrich

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Abstract

We investigate capital allocation across a firm's divisions that differ with respect to the degree of asset tangibility. We adopt an incomplete contracting approach where the outcome of potential debt renegotiations depends on the liquidation value of assets. However, with diversity in terms of asset tangibility, liquidation proceeds depend on how funds have been allocated across divisions. As diversity can be traced back to institutional differences between countries, we provide a rationale for multidivisional decision- making in an international context. A main finding is that multinationals may be bound to go to certain countries when financiers cannot control the capital allocation.

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Paper provided by Halle Institute for Economic Research in its series IWH Discussion Papers with number 4-06.

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Date of creation: Apr 2006
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Handle: RePEc:iwh:dispap:4-06

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Related research
Keywords: Internal capital markets; multinational corporations; incomplete contracts; asset tangibility;

Find related papers by JEL classification:
G31 - Financial Economics - - Corporate Finance and Governance - - - Capital Budgeting; Investment Policy
F23 - International Economics - - International Factor Movements and International Business - - - Multinational Firms; International Business
D82 - Microeconomics - - Information, Knowledge, and Uncertainty - - - Asymmetric and Private Information

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